Welcome to the Stella-Jones Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Monday, May 3rd, 2021. I will now turn the call over to Éric Vachon, President and CEO. Please go ahead.
Good afternoon, ladies and gentlemen, and thank you for your patience during our technical difficulties. I'm here with Silvana Travaglini, Chief Financial Officer of Stella-Jones. Thank you for joining us for the discussion on the financial and operating results for Stella-Jones' first quarter ended March 31st, 2021. Our press release reporting Q1 results was published earlier this morning. It, along with our MD&A, can be found on our website at www.stellajones.com and has been posted on SEDAR today as well. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Today, we reported all-time record first quarter sales of CAD 623 million, up 23% year-over-year, and EBITDA of CAD 99 million.
We had an exceptionally robust start to the year, fueled by record pricing and volume gains in the residential lumber product category and by our ability to adapt to the unprecedented lumber market conditions and capitalize on our extensive procurement network and source of supply to deliver strong results. Our results this quarter also benefited from a solid performance in our utility pole category and strong railway tie demand tempered by pricing pressures in the non-Class I business. In anticipation of continued solid demand in all three of our core product categories, we used our strong balance sheet in Q1 to invest in working capital and in our network. Subsequent to quarter end, we also secured additional liquidity to enhance our financial flexibility for growth opportunities as we look to drive continued creation of value for shareholders.
I would like to take this opportunity to thank our employees for their commitment in achieving exceptional first quarter results and our suppliers and customers for their continued collaboration and support. I will now provide you a brief overview of our first quarter results. Sales for the first quarter of 2021 amounted to CAD 623 million, up from sales of CAD 508 million for the same period in 2020. Excluding the negative impact of currency conversion, pressure treated wood sales rose CAD 102 million while sales for logs and lumber increased by CAD 36 million. Utility pole sales amounted to CAD 206 million, in line with the same strong Q1 sales last year. Most of the sales increase was driven by upward price adjustments in response to raw material cost increases and a favorable sales mix, including the impact of greater fire-resistant wrap pole sales volume.
Overall volumes were relatively unchanged compared to Q1, as lower project-related volume this quarter was offset by lower maintenance demand, particularly in the U.S. Southeast, due to the extreme winter weather conditions. Railway tie sales were CAD 158 million, down 8% compared to sales of CAD 172 million for the same period last year. Railway tie sales decreased organically by CAD 6 million or 3%. The overall increase in volume this quarter was more than offset by lower pricing, largely due to non-Class I business. Pricing headwinds and an unfavorable product mix explain most of the reduction in the sales price for non-Class I business, while some outward pricing adjustments in response to lower fiber costs unfavorably impacted pricing for Class I customers. Residential lumber sales rose to CAD 166 million, up 134% from CAD 71 million for the same period in 2020.
This significant increase was largely driven by the exceptional rise in the market price of lumber. We continued to benefit from strong demand, bolstered by an early start to the season for home improvement projects. Our ability to service our customers led to us winning a greater proportion of our customers' annual programs. Industrial product sales amounted to CAD 28 million, largely in line with the CAD 29 million of sales generated a year ago. Our bridge sales were lower this quarter, mainly timing related, but were offset in large part by the increased activity and demand for pilings. The sales of logs and lumber, a product category used to optimize procurement, totaled CAD 65 million, more than double the sales of CAD 29 million generated in the same period last year.
This increase is primarily due to the significant increase in the market price of lumber. Silvana will now provide further details regarding our results and financial position before I conclude with our outlook. Silvana?
Thank you, Éric, and good afternoon, everyone. Turning to profitability. Driven by strong sales growth, gross profit increased 35% this quarter to CAD 112 million, compared to gross profit of CAD 83 million in the first quarter last year. Similarly, EBITDA and operating income rose 57% to CAD 99 million and 82% to CAD 82 million respectively. This first quarter record profitability stems from the high market price of lumber, the continued strong residential lumber demand, and the company's ability to increase its market reach in residential lumber.
Improved pricing for utility poles and volume gains for railway ties also contributed to higher profitability this quarter but were offset by the pricing pressures for the non-Class I railway ties business. As a result, net income for the first quarter doubled to CAD 56 million, or CAD 0.85 per share, compared to CAD 28 million or CAD 0.41 per share last year.
Turning to liquidity and cash flow resources. Cash flow generated from operations before changes in non-cash working capital components and interest and income tax paid was CAD 100 million in the first quarter. The increase in working capital decreased liquidity by over CAD 200 million during the quarter, and this was largely due to the seasonal increase in working capital, the higher level of sales, and the increased inventory costs stemming from the higher market price of lumber.
During the quarter, we invested CAD 14 million in capital expenditures and returned capital to shareholders by buying back 800,000 shares for a total of CAD 37 million. There are 1.4 million shares remaining in the current normal course issuer bid program. As of March 31st, 2021, Stella-Jones' net debt, including CAD 137 million of short-term debt, increased to CAD 935 million, and the net debt-to-EBITDA ratio stood at a comfortable 2.2 times.
Subsequent to quarter end, we closed a $350 million U.S. senior unsecured credit facility, including a term loan facility of up to $250 million U.S. and a revolving credit facility of $100 million U.S. This facility provides us with additional liquidity at very competitive rates to continue to execute our growth strategy. Yesterday, the board of directors of Stella-Jones declared a quarterly dividend of CAD 0.18 per common share, payable on June 22nd, 2021, to shareholders of record at the close of business on June 1st, 2021. 2021 will be the 17th consecutive year of dividend increases. I will now turn the call back to Éric for the outlook. Éric?
Thank you, Silvana. Based on the strong quarterly performance and the expectation that the higher levels of pricing for lumber will continue to favorably impact the profitability of the residential lumber product category during the seasonal peak demand period, we now expect EBITDA to be in the range of CAD 450 million-CAD 480 million. This guidance anticipates headwinds of approximately CAD 90 million in sales from the deterioration of the value of the U.S. dollar relative to the Canadian dollar. Excluding the currency conversion impact, we project sales growth to be ranging between 15%-low 20% for 2021. We continue to expect utility pole sales to increase in the mid-to-high single-digit range compared to 2020, as we project sustained growth in replacement demand, including an increase in the value-added fire-resistant wrap pole sales.
While sales for railway ties and industrial products are projected to be relatively comparable to those generated in 2020. For residential lumber, we are now forecasting sales to increase in the range of 45%-65% compared to 2020, and this is driven by the current trend of higher pricing, which is projected to continue during the peak demand season. Please consult our MD&A for a full list of economic and market assumptions used to prepare this guidance. As for our priorities for 2021, we intend to be active on the acquisition front, focus on innovation, continue to improve our operating efficiency, and expand our capacity to sustain our profitability. We recognize the importance to integrate environmental, social, and governance considerations in key business decisions and strategies. We are focused on enhancing our ESG practices, developing better strategies to meet our goals, and creating superior value for all our stakeholders.
This concludes our prepared remarks. We will now be pleased to answer any questions you may have.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, again, press star one. Your first question comes from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.
Hey, thanks very much. Good afternoon, everyone.
Good afternoon, Walter.
I want to start in your tie business. Heard some of the potential consolidation that's happening, particularly with Kansas City Southern and Kansas City doing their own ties in-house. Came up on one of the conference calls. I'm just wondering whether you think that's a threat or an opportunity. Is it an opportunity that should KCS be acquired, that you could look to purchase their tie business, or is it a threat in that whoever buys KCS may look to maximize the use of that business line within KCS? Just curious your thoughts there, Éric.
Thank you, Walter. We are important suppliers to both the Canadian National and the Canadian Pacific. Both of those entities or both of those companies, as you know, do not operate their own treating facility. I would believe that a consolidated group, either way, would probably lean more towards wanting to divest those assets. That being said, Stella-Jones operates a facility that is online with the KCS, and we do actually supply certain requirements such as bridge timbers and certain tie requirements throughout the year to the KCS. We are very well positioned to benefit ourselves from this merger.
Okay. Moving on, staying with railway ties for a moment, you mentioned that last quarter that you, or I guess the quarter before that, relatively comparable top-line level for railway ties, excluding forex. Just curious whether that view for the top line is changed with your first quarter results here.
Not at all. We maintain our guidance for our railway tie product category to be comparable year-over-year. We base that off the fact that all our Class I customers have indicated similar maintenance programs. Although we're slightly behind after the first quarter, it's simply a question of timing of orders.
Okay. Like I asked on the last call, any reason why, if there has been any possibility of deferral, they are probably doing it given the amount of traffic and congestion, it sets up quite nicely for next year, potentially if it was deferred to see some of that volume come in in 2022. Is that still the case?
Well, yes. What's encouraging is that the major railroads in North America are posting great results. Traffic is increasing on the rail network, which means more usage, so it will lead to more maintenance. Very much optimistic about infrastructure spend in the next year or 24 months in the U.S. whenever that build comes through. I think, if you look beyond 2021, the future looks relatively encouraging for the rail tie business.
Okay, last question here on your poles side, mid to high single-digit had been the run rate. Kind of came in in that first quarter here now. Based on what you're seeing in terms of customer indications as we trend into the second quarter here, are you on pace? Would you say to that mid to high single-digit ex forex for poles as well for this year?
Yeah, definitely. Lots of inquiries from the contractor side of the pole business. COVID has subsided to some extent in the U.S. We're seeing activities pick up. Just remind also to the listeners that we do expect selling a bit more volume of our fire-resistant wrap poles. It looks very good for us for meeting our guidance for this year.
That's fantastic. Appreciate the time as always, Éric.
Thank you, Walter.
Your next question comes from the line of Michael Tupholme with TD Securities. Your line is open.
Thank you. Good afternoon.
Good afternoon, Michael.
Éric, the residential lumber business continues to exceed expectations. You're now calling for very strong year-over-year sales growth in the 45%-65% range for 2021. Certainly sounds like you expect growth to continue to remain strong in the second quarter, I'm wondering if you can talk a little bit about what you've built into the guidance or those expectations as it relates to residential lumber for the back half of this year.
You're exactly right, Michael. Our revised guidance is now considering higher year-over-year pricing. If you recall last year's trend, the first half of the year I would say had lower sales price on a book foot basis and we saw prices increase in the second half of the year. Most of the gains would come in the first half of the year. Mind you, after that, when we look at the second half of the year, that's where I guess our range comes more into play and really depends if lumber prices are going to subside to some extent or be maintained.
Okay, at the low end of your range, would that put you into a situation where your year-over-year growth organically in residential lumber turns negative in the third quarter?
Yeah. It could slightly be negative, yes.
Okay.
Yeah. Well, yeah, a bit more towards the last quarter, obviously, where the prices were much higher than the third quarter.
Okay. Yeah, fair enough. Just trying to get a sense for, I realize there's still a lot of uncertainty, and we don't know where prices are going to go, but that's helpful. Thank you. On the utility pole side, it sounds like you're still fairly upbeat about the business. I'm just wondering, with respect to the, you saw some lower maintenance demand in the first quarter, and part of that, I guess, was due to the weather events in the U.S. Southeast. Do you expect to see, or have you already seen any kind of a pickup on the maintenance demand side in the early part of the second quarter? Did those weather issues in the first quarter, did they create a situation where you could sort of have some catch-up activity in the second quarter?
Well, demand is definitely adjusting in a sense to trend towards our guidance. What we saw in the first quarter is that those winter orders, intense winter conditions we saw in the South, were not necessarily pole events. We didn't see poles breaking. Power was out. The maintenance crews would spend a lot of time reconnecting the grid and making sure that households and hospitals and domiciles got back their electricity as fast as they could. That's a bit of the reason for that slowdown when we refer to the weather event in the first quarter.
Okay. Just in terms of, I'm assuming, is it fair to say you have now seen some pick back up in that maintenance activity?
Yes. Demand is adjusting back to our expectations, and that's why we're comfortable guiding to the mid to high single digits for the year.
Okay. Just as far as the new credit facility for your U.S. operations that you entered into subsequent to quarter end, aside from the repayment of the bridge loan, what are the goals or the intended uses of that financing? You can let us know what the costs are there, but you did mention M&A as part of your prepared remarks. I'm not sure if this ties back into that.
There's a few things, Mike. One, we do have part of our current facility. There's a CAD 50 million tranche that is expiring in February 2022. We're setting ourselves up to be able to accommodate that reduction. Secondly, when we look at our goal of wanting to sustain an EBITDA leverage from two to 2.5 times, if we consider that we potentially want to execute on M&A, we need some dry powder ahead of us to be able to execute as such.
Okay. I guess just on that point, can you provide a little bit more of an update in terms of the M&A pipeline? You did mention that you intend to be active this year, but any commentary around timing and where you're at with some of the things you're pursuing?
Yeah. Well, last time we spoke on this call, it was maybe six weeks ago, I'd say. There's not much of an update with regards to M&A other than we keep progressing forward. Things are clearing up with regards to discussions with our targets. We're moving on forward. We're definitely dedicated to expand our footprint and maintain our leadership position in the North American market.
Okay. Thanks, Éric.
My pleasure, Michael.
Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Your line is open.
Yeah. Good afternoon, everyone.
Hello, Benoit.
Yeah. Just to come back on the railway side, could you talk about the continued pricing pressure experience with the railway ties, and what is driving this pressure?
Most of the pricing pressure is coming from the non-Class I business. As you know, we explained to some extent last year, we were very good last year in the back half of the year. As I explained, cherry-pick a bit of the orders where we wanted to compete ourselves, trying to manage our margin best we could. Right now, what we're seeing is we saw a bit of a more aggressive pricing again in the fourth quarter. The orders we took in the fourth quarter were actually sold in the first quarter, the first half of the year. It's a bit of a continued trend with regards to the pricing pressure.
I think it's also related to availability of ties, which we're starting to see tighten up slightly because obviously large demand for grade lumber and for pallet stock, which is competing with the center and block for ties, which is actually a good thing. I think a bit of tightening in the market will actually give us a chance to revisit pricing upwards, but that would most likely be in the second half of the year.
Okay. That's great. Just for residential lumber, could you maybe break down the component between pricing and volume and also maybe for the quarter, but also with respect to the 45%-65% the mix overall between the pricing and volume?
For our first quarter, the split is really 70% pricing, 30% volume. Our guidance right now is in better part related to the pricing.
Okay. That's great. For the new credit facility, any thoughts about the interest rate, whether it's accretive or dilutive versus the previous terms really?
Silvana, you want to take this one? You negotiated the agreement. I'll give you credit for doing a great job there.
Because, Benoit, it's part of the U.S. Farm Credit System, the interest rates, even though they're pretty much sort of competitive with our current facility, we will benefit from patronage dividends. Overall, our pricing would be lower than what we currently have with that facility.
Okay. That's great color. In terms of working cap for 2021, any color, given that you're building up the inventory for residential lumber? What we could expect, let's say, working capital change for the full year at Silvana?
Yeah. We're pretty much forecasting a similar trend as in Q4 of last year, given the strong residential lumber demand. We expect that we're going to have to build up inventory similarly like we did last year in the fourth quarter at higher cost. If we would have to sort of put a best guess, we would say that probably the buildup will be similar to Q4 of last year.
Okay. Perfect. Okay, that's great. Thank you.
Thank you, Benoit Poirier.
Again if you would like to ask a question please press star one on your telephone keypad. Your next question comes from Hamir Patel with CIBC Capital Markets. Your line is open.
Hi, good afternoon.
Good afternoon, Hamir.
I wanted to get your thoughts about the sort of Biden Infrastructure Plan, some of the proposals that are out there. What sort of impacts and how meaningful do you think that could be for both tie and pole demand?
Well, it's a difficult question to answer, Hamir. What I've read so far, there's several areas in the current bill that offer opportunities for us. It does talk about rail track maintenance and upgrades. It does talk about construction of new roads and road repair. Often when roads or highways are fixed, utility poles are either changed out or added in case of new construction. There are discussions about bringing broadband to rural areas. There's also lots of talks or descriptions about encouraging green energy initiatives, which would obviously, you would need some sort of electrical grid to bring the power into the network. I see multiple aspects in the current bill where we could benefit from. Now, we'll have to wait and see what the final bill looks like. I believe there's still a lot to be done until we see a final bill.
I think it is most likely encouraging for our future business, given the large presence that we have in both ties and poles. We should at one point benefit from it.
Great. Thanks, Éric. That's helpful. I just want to come back to M&A. I know in the past, Stella's spoken about potentially considering a fourth pillar to expanding to. Anything you could share there about where the board is at in terms of that sort of process and if you have any thoughts you could share on potential markets or product categories that could be of interest?
Yes. Well, certainly. I can't divulge any details because we are having discussions. The board has a task committee to come up with a strategic review for the next, let's say, three to five years, as where we're going for core products. As I mentioned in my prepared remarks, we're also looking into how we could leverage our strength as a company, be it our network or our customer base and so on, to be able to see what could be a great fit for Stella-Jones into those areas. I can't answer specifically, but I'm definitely being asked to explore and see if there's any great ideas to keep growing our business within our categories, but something also within adjacencies of what we do currently.
Okay, great. Thanks, Éric. Just the last question from me. The fire-retardant wrapped poles, what sort of proportion of your mix in poles do you expect that to be in 2021?
Approximately 5% of overall sales.
Okay. Where do you see that going? Is there a max that just given sort of weather constraints maybe or a max to that?
Yeah, 5% is our goal. This year, our expectation was for a full year of sales of that product to a certain number of customers. Had a bit of a slow start at the beginning of the year, but let's say using the 5% is good. We could revisit this question in future quarters as we're definitely going to start introducing this product in other regions of North America where forest fires are regular events. Right now, we're sort of projecting it at the 5% level.
Great. Thanks, Éric. That's all I have.
Thank you, Hamir. Thank you very much.
There are no further questions at this time. Mr. Vachon, I turn the call back over to you.
Thank you, Brett, and thank you everyone for joining us for this call today. We look forward to speaking with you again at our next quarterly call.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.